Some Questions and Answers on Fuel Taxes

TokyoTom on Roger Pielke Jr.'s Prometheus asks me some questions about a tax on fuels that emit CO2. 

1)  “Is the atmosphere an unowned, open access common resource?”

In general, yes.  There are exceptions, but let’s not talk about them for now.

2)    “While wealth is created by private economic transactions, if an unregulated good is used as part of the economic process, is some public wealth also destroyed?”

It depends.  When the unregulated good is “used,” is its value somehow lost?  A great example of this is RP Jr.’s fave rave, using big scrubbers to suck CO2 out of the air.  Such plants have at least the *potential* for killing or seriously stunting the growth of vegetation downwind.  In that case, the air downwind would be seriously degraded from the viewpoint of a farmer (for example).  In that case, the farmer’s wealth WOULD be destroyed.  Another case would be using groundwater, and discharging the used water to the surface (where only a small fraction would find its way back to the water table).  But I don’t see any closely similar mechanism applying to CO2.   First of all, no one is made sick or has their property directly damaged by CO2.  Second, we aren’t even generally talking about damages occurring at present; we’re talking about hypothetical damages occurring in the fairly distant future (e.g. more than 30 years from now).

3)  “Do market prices the cost of release of GHGs dumping at $0?”

Not entirely.  For example, landfills generate a lot of methane.  That methane can be used to generate electric power, or to heat buildings.  So there’s an opportunity cost to releasing that methane, instead of using it to generate generating electrical power or heat buildings.  Similarly, if someone drives a gas-guzzling car, that car costs more to refuel than a more fuel-efficient car.  That effectively puts a cost on the CO2 emitted.

4)  “Does the absence of a market signal tend to encourage economic behavior that has destructive aspects, because actors have no incentive to rationalize their use of the resource or to take into account damages that may result to others from such activity?”

Yes, but I don’t agree the market signal is completely absent.  Plus, from the point of view of future generations, I think the damages will be trivial (see following answers).

5)  “Is this similar to a subsidy of current consumption taken from future generations, extracted by means of impoverishing ‘unowned’ common resources?”

Oh, my.  First, I don’t agree the resource is “impoverished.”  Air with 600 ppm of CO2 in it is not (significantly) less valuable than air with 300 ppm CO2.  Second, the “taken from future generations is important.”  Let me give illustrations:

Suppose your grandparents had borrowed money before you were born, which you had to repay (at no interest…just the amount of the debt)?  Would you say that was wrong?  What if they borrowed 2x your current salary, and spent it all on renting 100 berths (for their pets) aboard the Titanic?  That would clearly be wrong!  But what if they’d borrowed $300 so your grandmother to could come to

America

from the mother country,

Russia

, to marry your grandfather?  Would that be wrong?   Or suppose they’d “merely” spent it on several months rent during the Depression…would that be wrong?  Further, suppose when they died, their estate was worth $1000, and you got the debt of $300, but also got a quarter of the estate…or all of the estate?  Would that be wrong?

6)  “Are there true costs to using the global commons in this way? In looking at this, please consider the conclusion that there is a discernible climate change and a discernable human fingerprint on it, that temps have only risen one degree, but climate sensitivity appears to be about 5+ F in the event of a doubling. Besides considering the costs imposed by climate change through its ecological effects, direct damage to human assets and activities and possible benefits, please also consider the costs of adapting infrastructure to the changes. Consider both costs already felt and those that can be anticipated and discounted.”

First, I have somewhat different numbers that I want to submit as the “true” numbers:  a) The warming from 1885 to 2005 is almost exactly 1 deg C…so that’s 1.8 deg F.  b)  I think the future warming has a 50/50 chance of being less than 1.5 deg C…so that’s future warming of 2.7 deg F.  But I’m just pointing that out because I’m a geek, and spent a fair amount of my time determining the warming for 2100. 

But whatever.  Let’s say that the damage from the future warming has a present value of $3 trillion (year 2005 dollars).  Let’s further assume 2% inflation throughout the rest of the century (true inflation is much lower, but let’s ignore that fact).  Therefore, the value of the damage in year 2100 dollars is:  $3 trillion x 1.02^95 = ~$20 trillion.  (Give or take.)

Have we done something bad?  Well, let’s start by assuming that all the temperature rise in 2100 is all *our* fault…that the rise in 2070, 2080, 2090 is not at all caused by the people in 2100.  All of the people in 2100 are completely blameless for any of the temperature rise.   Have we done something bad, sticking them with a $20 trillion debt?  Well, just like the grandparents’ debt scenario, the answer would be “it depends.”  First, how rich are people in 2100?  My answer is:  “They will be so rich it is almost inconceivable today.”  The world GDP in 2000 was approximately $45 trillion (year 2000 dollars).  I’m predicting that the world GDP in 2100 will be approximately $80 QUADRILLION (year 2000 dollars).

7)  “In the absence of a pricing mechanism (via private ownership of emission permits, taxation or other device) that values the use of the atmosphere as a GHG dump, what market incentives do fossil fuel providers or consumers have to move to new technologies that economize on GHG emissions?”

As I already mentioned, Japan, the EU, China, India, the U.S….we ALL have an incentive to move away from:  a) coal, because it emits so many *conventional* pollutants (e.g. SO2, particulates, NOx, mercury, etc.), b) oil, because it costs so much, and because the revenues go governments like those in Saudi Arabia and Iran. 

8)  “Presumably you have no problem with purely private transactions between economic actors involving resources and products owned by them; neither do I, so long as I can also sue for any damages they might cause me. But the externalities associated with certain behaviors has led to regulation, including establishing private property rights in the case of SO2 emissions. What is so conceptually different about establishing similar transferrable property rights in GHJG emissions?”

The huge conceptual difference is that SO2 emissions cause easily identifiable damage to human health (e.g., through conversion to sulfate particles) and property (e.g. through acid rain) right now.  You’re talking about CO2 which we THINK may cause damage (above the benefits) sometime in the future.

Do you really want to reduce CO2 emissions as much as possible, at the lowest possible cost?  Well, rather than setting up a tax, and then hoping it will lead to lower emissions (even though a simple market analysis will show that any realistic tax will result in virtually no emission reduction) you should instead be advocating for much more aggressive funding of research into non-CO2 emitting technologies.

a) Do you know what the U.S. government funding is for non-tokamak fusion? I don’t know the exact number, but I do know for certain that it’s under $10 million per year.  And probably even under $1 million year.

b) Do you know what federal funding for photovoltaics is?  I do know that…it’s $64 million per year.

If the U.S. government simply borrowed $10 billion (with a current debt of over $8 trillion, no one will even notice it), and spent $5 billion on non-tokamak fusion research and $5 billion on photovoltaics, it would probably do a LOT more to reduce worldwide emissions of CO2 in the 21^st century than raising the price of gasoline by $0.50 cents a gallon (at an ANNUAL cost of $65 billion) will ever do.  And if they spent a full $65 billion (one year of gasoline tax) on non-tokamak fusion and photovoltaics, they’d almost certainly develop those two technologies to a point where no one in the world would need to burn fossil fuels for energy.

Robert Samuelson was right about global warming ("The Real Inconvenient Truth About Global Warming").  The real solution to global warming is to develop energy technologies that don't emit CO2 that people actually PREFER to existing energy technologies, because the new technologies are cheaper and better than existing technologies.

Comments

[Kerry Thompson]

Mark,

I read Prometheus regularly and found a reference to this blog. I have a few semi-random comments (sorry, no joke intended).

Regarding future energy sources -- I'm not up-to-date on fusion research, but I'm curious why you haven't mentioned next-generation fission systems to tide us over until we get a little further down the road. I guess I hold something of a grudge against the folks who succeeded in getting the Integral Fast Reactor (Argonne) canceled -- had it not been for them, we would now be deploying inherently-safe zero-emission breeders running on "spent" fuel rods. That would have gotten us a couple of hundred years forward at the least. Any comments?

I'm not a big fan of photovoltaics, mainly because they're so far from break-even. Worse yet, when the government gets involved in its consumption-oriented tax credit programs, it diverts capital into venues with net loss, such as photovoltaics and ethanol. Do you foresee the day when photovoltaics will break even, and, if so, will that be due to skyrocketing energy prices or technology improvements (and won't skyrocketing energy prices also increase the cost of photovoltaics)?

And count my "aye" vote for the Robert Samuelson position.

[Mark Bahner]

Hi Kerry,

You write, "Regarding future energy sources -- I'm not up-to-date on fusion research, but I'm curious why you haven't mentioned next-generation fission systems to tide us over until we get a little further down the road."

I didn't mention next-generation fission systems because I don't think fission will ever achieve a substantially bigger part of the electrical generation mix--let alone the total energy mix--than it has today.

The way I look at it is this: I don't see the breeder taking off in the U.S., Europe, or Japan. So that leaves only China and India. I can see the *possibility* of that happening, but my understanding is that conventional once-through fission plants are all that is planned for at least the next few decades.

I think there's at least a 50/50 chance of (non-tokamak) fusion becoming commercial before 2050. If so, then breeders will never take off, I think. That's just my guesstimate of future trends.

Regarding you comment on photovoltaics and "break-even"...do you mean "producing more energy than used to manufacture them"? If so, I'm pretty sure that photovoltaics crossed that barrier a long time ago.

It appears your use of the term "break even" means instead, "becomes equal in price per kilowatt-hour to the cheapest electricity source" (e.g. coal, natural gas, or nuclear fission). If so, I think photovoltaics will become equal in price per kilowatt-hour with the cheapest electricity sources some time in the 2030-2050 time frame. I view that as happening mainly because photovoltaics will come down in price from their present cost of 25-30 cents per kilowatt-hour down to the cheapest sources costing 3-5 cents per kilowatt hour, rather than those cheapest sources going up in cost very much.

Best wishes,
Mark